Hill v Spread Trustee Company Ltd & Anor

Insolvency Act 1986 section 423 turns on the purpose for which a transaction at an undervalue was entered into. The transaction need not itself cause the prejudice. It is enough that entering into it formed an essential part of a real and substantial purpose to prejudice a claimant’s interests; that purpose need not be dominant.

“Interests” are wider than existing legal rights, and the person intended to be prejudiced need not be the person ultimately protected as a victim. Security may be granted for no consideration under section 423(1)(a). Forbearance is consideration only where it was genuinely given. A trustee in bankruptcy’s section 423 claim accrues on the bankruptcy order for limitation purposes.

The trustee in bankruptcy sought relief under Insolvency Act 1986 section 423 concerning a 1989 settlement made by the bankrupt in favour of his daughter, later charges securing loans from the settlement trustees, and an assignment of a loan account.

HHJ Weeks QC, sitting as a deputy High Court judge, held that the settlement and certain later securities were transactions defrauding creditors. He made consequential protective and restorative orders: [2005] BPIR 842.

The trustees appealed findings that the settlor concealed a £700,000 offer in order to obtain an artificially low tax valuation, the conclusion that later security was given without consideration, and issues concerning purpose, victims and limitation.

1. Appeal dismissed on the issues argued. The remaining issues concerning the form and extent of relief were stood over for a further hearing.

2. The judge was entitled to find, from the contemporaneous attendance notes and the surrounding circumstances, that the settlor had received an offer of £700,000 for the settled land and deliberately concealed it. He could infer a subjective purpose to induce the Revenue to make an incorrect tax assessment.

3. For Insolvency Act 1986 section 423(3), the prohibited purpose need not be dominant. It must be a real and substantial purpose, rather than a mere hope. The transaction need not itself produce prejudice. It is sufficient that entering into it was an essential part of the intended means of prejudicing the interests of a person making, or who might make, a claim.

4. The statutory term “interests” is wider than legal rights. A person may be a victim although the person entering into the transaction did not intend specifically to prejudice that person. In the unusual circumstances, uncertainty over the continuing effect of the tax compromise did not prevent the court from granting section 423 relief designed to protect a possible victim.

5. The later charges and assignment were capable of being transactions on terms providing for no consideration under section 423(1)(a). The alleged forbearance was not genuine consideration. The trustees could not then demand repayment of the relevant loans and had applied no real pressure. The security was accordingly granted without consideration and with the purpose of placing assets beyond the Revenue’s reach.

6. On limitation, Lady Justice Arden would have held that time ran when a victim existed. Sir Martin Nourse, with whom Lord Justice Waller agreed, held that a trustee in bankruptcy’s cause of action accrued on the bankruptcy order. The application was therefore in time. The applicable six- or twelve-year period did not affect that result.

7. Lady Justice Arden also expressed a provisional doubt, unnecessary to the result, whether the reasoning in Re M C Bacon Ltd concerning security and transactions at an undervalue applied to legal-mortgage charges or the assignment in issue.

• Court of Appeal (Civil Division): dismissed the trustees’ appeal on the issues argued and stood over unresolved relief issues: [2006] EWCA Civ 542.
• High Court, Chancery Division: HHJ Weeks QC declared that the settlement, later charges and assignment fell within Insolvency Act 1986 section 423, and made consequential relief orders: [2005] BPIR 842.